skills/earnings-events/references/modules/M055-bankruptcy-distress-and-liquidity-events.md

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<!-- Module: 055 | Title: Bankruptcy, Distress, and Liquidity Events -->

## PART XI - CATALYSTS AND EVENTS | MODULE 055

# Bankruptcy, Distress, and Liquidity Events

> Mission. Analyze runway, covenants, collateral, priority, recovery, dilution, and restructuring pathways.

## Decision output

Objective: Analyze runway, covenants, collateral, priority, recovery, dilution, and restructuring pathways. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Build a near-term cash runway at monthly or 13-week granularity when liquidity is critical, incorporating restricted cash, revolver availability, seasonal working capital, committed capex, interest, maturities, and restructuring cash.

1. Read debt documents for collateral, priority, guarantees, covenants, borrowing-base limits, cross-defaults, baskets, and amendment/waiver mechanics.

1. Stress operating cash flow and working capital before valuation. Identify the date and event that exhausts liquidity under each scenario.

1. Map management financing options by timing and realism: capex cuts, asset sales, dividend suspension, revolver, secured debt, exchange, equity, rescue capital, covenant amendment, or restructuring.

1. Estimate enterprise recovery under multiple normalized operating outcomes and allocate value through legal priority to each debt/preferred/equity claim.

1. For common equity, model dilution and zero-recovery pathways explicitly rather than treating distress as a simple lower multiple.

## Required evidence and model bridge

- Primary-source set: event filings, guidance, consensus context, transaction documents, covenant and liquidity data. Preserve exact document/version, date, period, and source location for every material factual input used in bankruptcy, distress, and liquidity events.

- For each key concept - security-by-security debt, liens, maturities, covenants, unrestricted cash, revolver - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as bankruptcy, distress, and liquidity events may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| liquidity runway | Unrestricted cash + committed undrawn facilities - required minimum cash, divided by forecast monthly/quarterly cash burn after near-term maturities. | liquidity runway: Tie cash, debt, facilities, maturities, and fixed charges to balance-sheet/footnote data; stress availability restrictions, refinancing assumptions, and downside cash generation. |
| fixed-charge coverage | Cash earnings available for fixed charges divided by cash interest, required lease/rent payments, preferred dividends, and other contractual fixed charges included in the definition. | fixed-charge coverage: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |
| recovery by claim | Value distributable to each capital-structure class after enterprise-value scenarios and administrative/priority claims, divided by that class's allowed claim. | recovery by claim: Audit a sample back to dated evidence and decision records; verify the stated threshold/score is reproducible by an independent reviewer and tied to a defined decision consequence. |



## Distress and recovery laboratory

- Build a 13-week cash view when liquidity is acute, then a monthly/quarterly runway. Include restricted cash, revolver availability, borrowing-base limits, covenant tests, letters of credit, working-capital seasonality, and restructuring cash costs.

- Map legal priority: secured debt, unsecured debt, leases/other claims, preferred equity, and common equity. Estimate enterprise recovery under multiple operating values before allocating to each claim.

- For equity, distinguish temporary liquidity pressure from a capital-structure problem that can cause dilution, exchange offers, rescue financing, or zero recovery.

## Worked application

> Case: cash appears sufficient but a springing covenant activates earlier than cash runs out.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For bankruptcy, distress, and liquidity events, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through security-by-security debt, liens, maturities, covenants, then identify which link is directly observed and which link remains an assumption.

- Calculate liquidity runway, fixed-charge coverage, recovery by claim from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for bankruptcy, distress, and liquidity events: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: model contractual triggers and common-equity survival separately from enterprise viability.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the bankruptcy, distress, and liquidity events conclusion.

## Failure tests

- FAIL if security-by-security debt cannot be defined and reproduced from the source pack.

- FAIL if the analysis applies a lower valuation multiple before modeling cash runway, covenants, maturities, collateral, claim priority, financing access, and recovery scenarios.

- FAIL if the bankruptcy, distress, and liquidity events conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the bankruptcy, distress, and liquidity events conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the bankruptcy, distress, and liquidity events conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.